While the global gas market was preparing for a substantial increase in natural gas supply in the next years, driven by new liquefaction projects expected to come online, prevailing concerns were largely confined to the risk of a supply glut, downward pressure on prices, and subdued demand. Meanwhile, a more balanced outlook was anticipated for LNG carriers, as incremental cargoes from increased LNG supply were expected to partially absorb excess tonnage. However, the US decision to engage in a joint military intervention with Israel against Iran has not only challenged this narrative but fundamentally reshaped it toward a supply-constrained market, with the outlook now heavily dictated by escalating geopolitical risk in the Middle East.
The de facto closure of Hormuz, coupled with the declaration of force majeure by QatarEnergy at Ras Laffan LNG complex halting gas production, alongside Israeli missile strikes on South Pars gas field and Iran’s retaliatory attack on Ras Laffan, have severely disrupted supply. The latter resulted in damage to two LNG trains, with estimations for a production loss of 12.8 mtpa for three to five years, equivalent to approximately 17% of the country’s annual LNG output.
The loss of Qatari volumes represents a direct supply shock for the natural gas market, as Qatar is the second-largest LNG exporter behind USA, providing around 20% of global LNG exports, serving mainly East Asia and Subcontinent, rendering these regions (especially Subcontinent) particularly exposed.
This contraction in available supply has significantly tightened the global gas balance, triggering a sharp increase in benchmark prices. Given the inelastic LNG demand in the short term and heightened concerns over access to LNG sources, market participants have reacted swiftly. Although the market is at the threshold of the seasonal shoulder period characterized by declining heating demand before colling demand kicks in, European and Asian buyers are actively competing for flexible US LNG cargoes, rendering the spread between the JKM and TTF benchmarks key determinant of trade flows.
Despite the ramp up of US LNG exports, the scale of Qatari volumes cannot be replaced in the near term. Australian output (the third major exporter) remains largely stagnant, while other exporting regions lack sufficient spare capacity. Under these conditions, importers are adapting to a structurally tighter environment. The Indian Subcontinent faces the most immediate pressure due to its high dependency on Qatari volumes, whereas Europe’s vulnerability is likely to intensify later in the year, particularly as it seeks to replenish gas storage levels, which exited winter at historically low levels below 30%.
Potential mitigation strategies include increased reliance on domestic reserves, shifts in the energy mix toward coal, and sourcing from alternative suppliers such as Russia, Nigeria, and Canada. While these producers cannot fully offset the loss of Qatari supply, they are expected to act as marginal suppliers, reinforcing their strategic importance in an increasingly tight market.
This backdrop has driven a sharp increase in LNG spot rates throughout March, primarily fuelled by uncertainty and supply disruptions linked to geopolitical escalation and the effective closure of Hormuz, which has also constrained UAE exports. Spot earnings for a 174k cbm LNG carrier have surged to above $160,000 per day, approximately 5.5 times February’s average, reaching levels last observed in late 2023.
In the short run, rates are expected to remain supported by a convergence of factors, including increased ton-mile demand as US cargoes are diverted toward Asia, and regional tonnage constraints, with approx. 4% of LNG fleet remaining in the Persian Gulf. Meanwhile, the re-entry of QatarEnergy-controlled vessels into the spot market, approximately 10 units already observed, may partially offset upward movement of rates.
However, from a structural standpoint, should disruptions to Qatari output persist, significantly reducing available cargoes, the broader outlook turns bearish, particularly against a backdrop of oversupply in the LNG carrier market and excess tonnage weighing on fundamentals.
Overall, the LNG carrier market is expected to remain volatile, driven by the intersection of geopolitical risk, logistical disruptions, and underlying supply fundamentals. A gradual rebalancing will hinge either on the full restoration of Qatari exports or on the gradual easing of the supply deficit as new liquefaction capacity comes online.
Data Source: Intermodal